Dubai Debt Follows String of Troubles for Its Ruler

By

Chip Cummins and

Andrew Critchlow

Updated Dec. 1, 2009 12:01 a.m. ET

DUBAI -- This city-state's announcement last week that it would seek to delay debt payments represents the latest in a string of troubles for its ruler, Sheik Mohammed bin Rashid Al Maktoum, and a coterie of economic advisers struggling with the fallout of the global economic crisis. Over the last several decades, Dubai's debt piled up as government-related companies borrowed to fund development at home and acquisitions abroad, to extend the emirate's wealth and international reach. After Sheik Mohammed took over as crown prince in 1995, he assumed effective control of the emirate's economic development.

On his Web site he describes his business approach as hands-on and ambitious, adding, "I take decisions and I move fast. Full throttle."

He organized the economy around state-owned conglomerates, picking loyal deputies to head each one. They competed against each other for projects and capital, tapping local and global banks that were eager to lend amid an oil-fired regional boom.

Ports and real-estate conglomerate Dubai World, led by Sultan Ahmad bin Sulayem, the son of a close advisor to Sheik Mohammed's father, built a palm-tree-shaped island dotted with luxury hotels and villas. Developer Emaar Properties PJSC built the world's tallest skyscraper.

Bankers and credit analysts assumed there would be government support from Sheik Mohammed -- and from the United Arab Emirates' federal government in Abu Dhabi -- if they ever overextended.

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But when the global financial crisis hit last year, foreign investors fled Dubai's property market, a pillar of the economy. Unease over Dubai's debt turned into global concern, and the cost of insuring Dubai debt against default started to rise sharply. Dubai said it would throttle back development and announced that one of its sovereign funds would start buying domestic real estate, an attempt to prop up the market. Debt wasn't a worry, officials said.

Developers, many of them state-owned, saw their cash flow disappear. Buyers, who could put as little as 10% down, stopped paying installments. Builders started complaining about missed invoices.

Sheik Mohammed turned to a new finance chief and in February, Dubai orchestrated a novel $20 billion bond program, of which the first $10 billion tranche was fully subscribed by the U.A.E. central bank. Dubai said it would use the money to meet its own debt obligations and unpaid bills by developers.

The U.A.E. offered more, but Dubai turned down the offer, according to one person familiar with the situation.

Just as investors started to breathe easier because of the big show of federal support, Sheik Mohammed dumped his new finance chief, with no explanation. Still, Dubai made its debt payments on time. In June, Dubai World, the biggest of Dubai's corporate entities, brought in restructuring outfit Alix Partners Ltd. to advise on an overhaul.

In mid-October, Dubai World said it would shed thousands of jobs and launch a major cost-cutting effort. Selling assets quickly wasn't a real option. Many of the company's businesses were still valuable but illiquid, according to a person familiar with the situation. The company wanted to avoid a fire sale, this person said.

Amid the restructuring effort, Mr. Sulayem, the chairman, was aloof, according to this person. His deputy, Jamal bin Thaniah, appointed chief executive in October, took on a more active role, this person said. Mr. Sulayem hasn't responded to requests for comment. A spokesman for Dubai World said he wasn't available.

A $3.5 billion sukuk, or Islamic bond, was coming due in December. While Dubai World signaled in the spring that a debt restructuring was an option, investors and analysts continued to expect a bailout.

In a letter to employees of Dubai World earlier this month, Mr. Sulayem said the Dubai government had assured the company "full support as an iconic company serving its role in the government's vision for the future." A spokesman declined to comment except to say the company would continue to communicate with staff about the restructuring, which "has been under way for some time and it continues," he said.

Earlier this month, Dubai's top officials gathered for a meeting of Sheik Mohammed's royal court, according to a person familiar with the situation. At Zabeel Palace, surrounded by manicured gardens, statues of prancing horses, and flittering peacocks, Sheik Mohammed was briefed on the extent of Dubai World's troubles, this person said.

In the days that followed, Sheik Mohammed announced the removal of several top economic advisers from key positions, including Mr. Sulayem. Then, on Wednesday, Dubai said it had raised $5 billion in debt commitments from two Abu Dhabi-controlled banks.

Investors interpreted the move as another indication that the federal government would come to Dubai's rescue if needed. Two hours later, Dubai came out with its standstill announcement.

The sketchy nature of the announcement -- a five-paragraph statement with few details -- compounded the market mayhem. A spokesman for the department said he couldn't comment beyond the statement, and a spokesman for Sheik Mohammed's court didn't respond to a request for comment.

Late Thursday night, Sheik Ahmed bin Saeed Al Maktoum, a senior Dubai finance official and the chairman of the Emirates airline, issued a statement saying that the standstill announcement had been carefully planned and promised more details this week. "This is a sensible business decision," he said.

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